Chaos, killing and kidnap

American troops in Iraq were last night locked in the most ferocious fighting since the war as the toll of Iraqis killed climbed to 460 and the military admitted it had lost control of two southern towns.

On the eve of the anniversary of Saddam Hussein's fall from power - a moment the US had imagined would be marked by celebrations - Iraq's fragile security began to fall apart.

In house-to-house fighting to regain control of Falluja, the death toll of Iraqis was 330. The Americans have lost 36 soldiers this week, the worst casualty rate since the fall of the regime. At least 13 foreigners, including one Briton, were kidnapped in different incidents, the first time that western civilians have been held by insurgents in Iraq.

A Briton, Gary Teeley, went missing in the southern city of Nassiriya earlier this week. Three Japanese civilians were being held by a Shia militia in the south and two Palestinians with Israeli identity cards were held by another group outside Baghdad. A Canadian humanitarian worker was also reported kidnapped last night, but seven other prisoners - South Korean Christian missionaries - were freed.

US marines fought for a fourth day to take control of Falluja, the troubled Sunni town west of Baghdad. In the capital, Iraq's interior minister, Nouri Badran, resigned, complaining about the influence of religious factions over the police.

Lieutenant General Ricardo Sanchez, America's most senior general in Iraq, admitted that coalition forces no longer controlled the holy city of Najaf, or the town of Kut. Both are now dominated by a Shia militia loyal to the radical cleric Moqtada al-Sadr, who has led uprisings across the south this week.

"We will do whatever is necessary to defeat Moqtada Sadr's forces wherever they are on the battlefield," Gen Sanchez said.

From his headquarters behind the razor wire and concrete blast walls of Baghdad, Paul Bremer, the US civilian administrator of Iraq, made an unusually frank admission of the depth of the security crisis he now faces.

"We are fighting to restore law and order so that all Iraqis can enjoy their new freedoms," he said.

He warned the hundreds of thousands of Shia pilgrims heading to a religious ceremony in the city of Kerbala this weekend of the serious risk of bomb attacks. The US and Iraqi authorities had only "limited capabilities" to provide security, he said. "The dangers this year are very real."

Since Mr Sadr led an uprising in cities across southern Iraq on Sunday, the US occupation authorities have struggled to rein in a huge gulf of violent opposition. The Shia rebellions and the Sunni resistance in Falluja have begun to claim support from a larger population of moderate Iraqis whose frustration at the occupation is now spilling over.

The Shia militias are becoming increasingly aggressive and appear to be targeting foreigners for kidnap, a tactic likely to scare away foreign workers, the few remaining aid agency staff and UN officials who are expected to help prepare for elections.

America faces its most serious trial in Falluja, where the 1st Marine Expeditionary Force has sealed the town and spent the past four days trying to kill hundreds of guerrillas in fierce encounters. For the second time in the battle, US forces called in one of their most devastating weapons. An AC-130 gunship was heard over the city in the evening, as reports from inside Falluja suggested around 330 Iraqis had died and as many as 500 had been injured.

Witnesses suggest that Operation Vigilant Resolve, as the marines call it, has claimed the lives of dozens of civilians, including women and children.

The battle has turned into a bloody shooting match which Iraqis say is unlikely to pacify Falluja and will only reinforce an ever-more desperate resistance movement.

Television footage showed insurgents taking positions in the rubble on street corners, their faces wrapped in red and white scarves, carrying Kalashnikov rifles and rocket-propelled grenade launchers. American jet fighters and helicopters circled in the sky overhead.

The marines have set up a heavily guarded cordon around Falluja, prohibiting access as their operations continue.

"There are a lot of victims under the rubble and no one can get to them because they are afraid of American snipers," said Mohammed Abdul Razzaq al-Zorbaie, an Iraqi journalist who lives in Falluja and who spoke to the Guardian by satellite telephone.

"It has become a ghost town. There are only resistance fighters and American soldiers on the streets."

Four trucks bringing food, medicine and donated blood arrived in Falluja yesterday in a convoy arranged by Iraqis at one of the biggest Sunni mosques in Baghdad.

But there is no electricity in the town and no water. There is little food available in the market and the vegetables that are on sale are 10 times more expensive than in Baghdad. The cost of fuel has also climbed to 10 times the usual price.

Mr Zorbaie said American snipers had taken up positions in some of the minarets in three of the city's mosques, and that few residents dared walk the streets. "No one can reach the cemetery to bury their dead, so they are burying them in the street or in their local mosques," he said.

"There are American aircraft above me and bombs being dropped on different neighbourhoods. Every street or neighbourhood in which there is gunfire it is immediately targeted by jet fighters."

Mohammed Hassan al-Balwa, the head of Falluja's city council, who is in Dubai for medical treatment, resigned his position. "This American behaviour is in creasing the size of the resistance and it is making all the people sympathetic to them," he said.

His council was created by the Americans, and Dr Balwa was one of the leading moderate voices in the city who had tried to negotiate with US commanders to find a solution to the endless cycle of violence.

"This behaviour of the Americans will make everyone seek revenge," he said.

"Falluja has become a symbol for those who reject the occupation."

US commanders were reluctant to give details of casual ties, but several marines were believed to have been injured and at least one was killed yesterday.

One marine with wounds to the head was shown being carried on a stretcher by his colleagues. Another American soldier was shown struggling to climb out of a burning tank.

"Coalition military forces are conducting powerful, deliberate and very robust military operations until the job is done," said Gen Sanchez. "It will continue and we will not be deterred."

He said there were links "at the lowest levels" between the Shia and Sunni insurgents.